Over the past week, European institutions have shown no qualms about bullying, arm-twisting, and humiliating a sovereign nation and its people. This is no union – this is a fiasco.
- By Edward HarrisonEdward Harrison is the founder of the Credit Writedowns and a former career diplomat and investment banker. Follow him on Twitter: @edwardnh.
Going into this past weekend, it looked as if the Grexit crisis that had occupied the world’s attention for weeks was finally heading into the final stretch.
Under pressure to comply with creditor demands, on Thursday Greece tabled a proposal that contained harsher austerity measures than the proposal that the Greek people had overwhelmingly rejected by referendum just one week prior. Prime Minister Alexis Tsipras then quickly garnered parliamentary approval for his proposal, to avoid the country’s economic collapse, returning to the negotiating table this weekend. Under pressure to make labor reforms, liberalize markets, and accelerate privatization in the face of threats to exclude Greece from the eurozone from German Finance Minister Wolfgang Schäuble, Greece had caved. It was total and complete capitulation — the white flag, if you will. Surely, it seemed by Friday morning, an agreement was close at hand.
But once Greece was at the table, something strange happened. The creditors upped the ante, looking for Greece to sign up to even more draconian and harsh terms. After hours of bickering, the negotiations ended with no conclusion and yet another ultimatum backed by Germany and its allies in the Netherlands, Austria, and the former eastern Bloc: either Greece accept the Eurogroup’s latest, more austere proposal for a bailout, ratify this series of reforms through Parliament by Wednesday or leave the eurozone “temporarily.” The demands included spending cuts, accelerated privatization, resolution of non-performing loans in the Greek banking system, and many other measures, all to be accomplished under the watchful eye of the Troika to ensure compliance. Italian Prime Minister Matteo Renzi saw these harsh terms as an attempt to humiliate Greece — as did many others commenting via Twitter.
Last Monday, I wrote on how the Greek referendum wouldn’t, and couldn’t, have changed the country’s reality. And that reality — the one that remains in place today — is that Greece faces one of only two possible outcomes: either harsh austerity and continued economic suffocation or exclusion from the eurozone, the so-called Grexit. The latter being a move that would precipitate a collapse in the banking system and economic turmoil.
Some may have believed that the overwhelming “no” vote of the referendum might have strengthened Greece’s hand, by creating an ugly dynamic in which the creditors appear to be overriding the democratically expressed wishes of a sovereign nation. After this weekend, those hopes have been dashed. The Greek government remains a supplicant, asking for mercy from its creditors, with little to no bargaining power. And the institutions, known as the Troika, have shown no qualms about trampling over delicate sovereignty issues. What transpired this past weekend and the days leading up to it was pure power politics.
After the referendum, the Greek government stated that Greece would not “leave” the eurozone voluntarily; it would need to be forced out. The European Central Bank (ECB), the only entity that has the power to do the forcing, because it controls Emergency Liquidity Assistance (ELA) to Greek banks, acted immediately with “haircuts on collateral for ELA adjusted” upward; in other words, no new bank notes for Greek banks from the local Greek branch of the ECB. Without new bank notes, Greek banks had so little cash on hand to meet withdrawals that capital controls could not be lifted until and unless the Greek government signed a deal with the Troika, which includes, of course, the ECB. This was an act of coercion.
That’s when the eurogroup gave its take-our-offer-or-face-expulsion-from-the-eurozone ultimatum. The third creditor, the International Monetary Fund (IMF) simply bowed out altogether, as Greece is now officially in arrears with the IMF, saying it couldn’t sign up to a new deal unless the eurogroup and the ECB took losses — so-called haircuts — on their Greek debt holdings. With the IMF disengaged, there would be no debt relief. And so Greece faced a choice to accept a eurogroup ultimatum harsher than anything proposed to date with minor tweaks here and there — and backed by ECB muscle — or simply watch their economy collapse into chaos.
But of course, the ultimatum Greece now faces also demonstrates the disregard of the euro system for any right to national sovereignty Greece may have as a member of the monetary union. It exposes the European project as a power grab by unelected elites at the European Commission and at the European Central Bank. For the first time ever, the whole world is realizing that not only does the European Union require a gradual fading away of national sovereignty as economic harmonization advances, it also involves an abrupt, violent, and complete loss of national sovereignty on the occasion that a country’s economy stumbles and requires assistance.
The Greek government is desperately trying to secure language in the final draft of an agreement with its creditors that its Parliament can stomach. But then it has the unenviable task of bringing whatever it secures back for a vote.
What will Greece do? I believe a unity or even a technocratic government would be hard-pressed to sign up to the deal currently on the table, let alone Syriza, a left-wing coalition. The present government has already lost members due to the first austerity proposal that it pushed through Parliament after the referendum. Of course, the potential of being excluded from the eurozone should focus minds. After all, according to the BBC, the Greek government has not helped its banking system and economy prepare for Grexit in any way.
Now, the idea of a “temporary” Grexit — floated by Germany, and provisionally included an early version of the ultimatum — as a potential out seems reckless: a Greece that temporarily exits the euro, then flourishes, would hardly want to re-enter, and a Greece that fails would not be permitted to rejoin. Thus, either way, the “temporary” Grexit would likely become permanent.
Meanwhile, the power politics continue: The Associated Press reported late Sunday that Tsipras is seeking a path to securing ECB aid for his country’s embattled banks as early as Monday; creditors, meanwhile, have demurred, saying they want to see Parliament pass austerity measures first before help is forthcoming.
After seven years of difficult economic adjustments, economic nationalists in Britain, in France, and even in Germany will seize upon these events and rightly call out the EU as a project by European elites with dubious long-term economic benefits for ordinary people. They will call for a break up of the European Union and a return to national governments with full national economic and monetary sovereignty. And eventually they will probably get what they want. The movement aimed at having Britain exit the EU — so-called Brexit — is just the beginning. With Greece, we are witnessing history in the making. This fiasco has put the disintegration of the European project in play.
Sean Gallup/Getty Images